For centuries, storing wealth in gold has been a popular option. When the future of the economy feels uncertain, you're likely to hear of more people considering gold as an investment. As a result, you often see the price of gold rising during economic decline or uncertainty.
Disclaimer: This information should not be interpreted as an endorsement of Gold. It is not a recommendation to invest.
Note: While both AUD and USD pricing are displayed above the graph, all mentions of price within the graph itself are displayed in USD.
What impacts the price of gold?
There are 3 things that determine the price of gold:
1. Inflation
2. Supply
3. Central banks
The price of gold is constantly moving. But have you ever wondered why?
Firstly, gold is traditionally seen as a hedge against inflation.
While it does not always work out in the real world, theoretically gold can deliver higher than inflation returns over the long-term.
As such, during times of economic uncertainty or during periods of higher inflation investors will flock to the asset.
The hope is that the price of gold will beat the increase in inflation.
The second determining factor is the supply of gold itself. Like any commodity, if you increase the supply then the cost of the good falls.
In reverse, if the supply falls and demand remains the same then the price of the commodity increases.
Finally, central banks play a huge role in determining the price of gold.
One of the key responsibilities central banks have for their nation's currency is to diversify their reserves.
This is because the price of a currency swings in value depending on the perceived strengths and weaknesses of the underlying economy.
If an economy is seen as weak and the central bank needs to lower rates or increase the supply of money through printing, then this becomes even more important.
While the currency itself has been devalued due to an increase in supply, the Central Bank can offset this by having a diversifier such as gold.
What is gold's all-time high?
As mentioned earlier the price of gold largely fluctuates but investors usually flock to it during times of uncertainty.
So, it might come as little surprise to investors that it reached an all-time high during the COVID-19 induced recession.
With economies around the world essentially in lockdown to stop the spread of COVID-19, the spot price of gold hit an all-time high of US$2,063 per ounce in August 2020.
Looking into buying gold? See our full guide on how to invest in gold in Australia here.
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